US EARLY MORNING: US index futures are up, Treasury yields are wider; contrarians are emerging, reports say; big retail focus this week, as well as continuing debt ceiling drama

OVERNIGHT: Asia-Pac stocks traded mixed following the subdued performance last Friday on Wall St where risk sentiment was hampered by a disappointing University of Michigan Survey and US debt ceiling concerns, while participants in the region brace for this week’s key economic releases including the latest Chinese activity data. Our APAC wrap is here. European equities start the week on a constructive footing, shrugging-off continuing angst around the looming US debt ceiling, as well as a likely run-off in Turkey’s Presidential elections, where the incumbent Erdogan has performed better than anticipated, though Turkish-related proxies have come under pressure. Data out of Germany showed wholesale prices falling 0.4% M/M, taking the annual rate to -0.5% Y/Y (prev. +2.0%). Over the weekend, ECB's de Guindos suggested that the cycle of rate hikes are in their final stretch, as a few of his colleagues did last week. ECB's Kazmir, however, leaned back against some of the more dovish chatter in recent days, stating that the central bank would need to raise rates for longer than previously thought in order to cap inflation. Our European cash open note is here.

US PRE-MARKETS: US equity futures are a little higher, and Treasury yields are a little higher too. The Dollar Index is slightly lower, with activity currencies seeing some upside. Crude futures trade around flat. Debt ceiling drama continues to linger, but President Biden says we should see progress in the next few days, with reports suggesting a meeting with Congressional leaders will take place on Tuesday, ahead of Biden’s visit to Japan (see below for more). Weekend reports have a contrarian feel, where some have become more bullish after the recent gloom (again, see below for more); additionally, earnings season has been a bit better than feared (albeit with a low bar of expectations), which is leading some to become more constructive about their future profits view (like Goldman, see below). The week ahead has a retail feel, with US retail sales data for April out on Tuesday, while we also get earnings updates from Walmart (WMT), Home Depot (HD) and Target (TGT), which could provide further sway into the economic growth narrative.

CONTRARIANS EMERGING: A WSJ report notes the bearish sentiment around US stocks – citing Bank of America recent monthly fund manager survey and the weekly survey from the American Association of Individual Investors – but says that amid the gloom, some are adding new equity longs as indices stall, and have reportedly been looking for bouts of volatility to put money back into stocks. And the FT writes that as human portfolio managers fret over the economic uncertainty and the health of US banks, algo driven funds have been buying stocks at one of the fastest rates in a decade in response to falling volatility, and Nomura says this has been the key to propping up the market as active managers sit on the side lines. Barron’s has also jumped into the contrarian camp, and discusses a potential break higher in US stocks, citing the CPI data which showed the tenth straight month of deceleration, while PPI is rising at the slowest rate now since early 2021.

CONSTRUCTIVE TECH VIEW: Technicians at Fundstrat argue that the SPX trend is still bullish, and they are looking for the SPX to a push above 4,200 this week, noting that dips have support between 4,080-4,090 region; the techs argue that the churn in equities continues, and while last week saw choppy consolidative trading, it did not do much to convince them that prices are headed sub-4,050 in the near-term. It also points to the Regional Banking indices (KBE, KRE) that despite trading near recent lows, have stabilised; if this sector falls beneath support levels, it could challenge the idea that stocks will rise above 4,200 before a significant decline. Fundstrat says that in the short term, there may be a test of the previous lows, with a possibility of briefly going below them, but the bigger picture centres on an approximately 100-point range for SPX that will have the most importance, with 4,154 being resistance and 4,050 as support. "It’s expected that Friday’s pullback should be buyable into the week, which will lead to a rally up to test and exceed 4,154 on its way to 4,200 and above," it says, "However, there should be strong resistance at 4,235-4,325.

EARNINGS SCORECARD: At the end of last week, aggregate S&P 500 earnings were -0.6%, according to Refinitiv data, with Discretionary (+55%), Industrials (+26%), Energy (+19%) and Financials (+8%) the only sectors posting profit growth; Materials (-22%), Utilities (-22%), and Health Care (-15%) were the laggards. Generally, analysts are accepting that earnings season thus far has been better than predicted, although the bar for expectations was low. Based on these results, GS is more confident in its prediction that the EPS for the year 2023 will be USD 224 (which would represent +1% growth). GS believes that the worst phase of negative earnings revisions is now over. That said, the bank still expects the EPS for 2024 to be USD 237, below the consensus view; GS says that expectations for profit margins remain too optimistic. The bank also acknowledges risks to its EPS view, mainly due to uncertainty in the banking sector. It anticipates real yields will increase, and the P/E multiples will decrease from 18x to 17x. If the P/E remains stable, GS says that could result in a 5% increase in its year-end target of 4,000 for the S&P 500.

DEBT CEILING LATEST: The US Treasury Friday said there was USD 88bln in extraordinary measures to use under its 34.1trln debt limit; that figure is down from USD 110bln in the previous week. Last week, a meeting between President Biden and Congressional leaders failed to break the impasse, but Biden thinks further talks will take place on Tuesday, and he said he remained optimistic on talks. Biden said talks were moving along, and we will know more about progress in the next couple of days. Deputy Treasury Secretary Adeyemo added that ongoing debt-ceiling negotiations were constructive between all parties, CNN said. The FT said the White House and Republicans were starting to shape a possible debt ceiling deal, with issues on the table narrowing, although any agreement was unlikely to be concluded before President Biden attends the G7 summit between May 19th-21st, but could take place after that. Washington Post reports that markets are not expecting a US default, but some companies are preparing; by selling short-term Treasury bills and corporate bonds maturing around June 1st, when the government might run out of cash, and buying safer money market funds even though they pay a lower return, in order to cover payrolls.

MS ON DEBT CEILING: Morgan Stanley’s chief economist Seth Carpenter notes that in the past, when the US government reached its debt limit, there was tension in the markets; Treasury bills became scarce, and their prices went up, except for those maturing around the deadline. The debt limit was eventually raised, but this time, MS thinks that the risks in the banking system could be higher. Volatility in the banking sector continues to be a concern for the bank, even though it is not expected to have an extreme impact on the US economy. One difference now is the existence of the Fed's reverse repo facility, which drains reserves from the banking system. As the debt limit deadline approaches, money funds may shift their holdings away from Treasury bills and into the reverse repo facility, further reducing reserves. This drain of reserves could amplify risks in the banking system, MS warns. The bank explains that the Treasury will need to issue more bills to replenish its General Account, and the increased supply could cause yield movements and further drain bank reserves. While the market has sorted things out in the past, the magnitude of yield movements this time could be larger due to the higher starting level, Carpenter writes. Funding market volatility adds to the risk, even in a scenario where the debt limit is eventually raised.

DAY AHEAD:

• Our full interactive day ahead calendar can be accessed here, a pdf version can be accessed here.


• 
  EURO: Eurozone industrial production is seen easing in March by 1.8% M/M. BoE’s chief economist Pill will speak on the rising cost of living and current economic conditions in remarks scheduled for after the European close. On the supply front, the BoE will hold a medium-term Gilt sale, while the DMO will sell 40yr debt via syndication. There is also a Eurogroup Meeting taking place today.


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  US: The US Day Ahead sees the release of the Empire Fed manufacturing survey, which will give us an early indication of what the May regional Fed manufacturing surveys may look like, and by extension, will help shape expectations for what the May ISM data will look like. March TIC flow data is due on the closing bell. On the speaker’s slate, Fed’s Bostic (2024) will speak on ‘Old Challenges in New Clothes’, Fed’s Barkin (2024) will be at the same event; after the close, Fed’s Cook (voter) will speak at Berkeley.


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  EARNINGS: The corporate earnings docket is thin today, with only Catalent (CTLT) of note; our daily earnings expectations can be accessed here. In the week ahead, numbers are due from HD on Tuesday; On Wednesday, TGT, TJX, CSCO, SNPS report; On Thursday, BABA, WMT, AMAT will report; and on Friday, DE will publish its earnings report; our full weekly earnings expectations are here.


• 
  WEEK AHEAD: This week, highlights include US retail sales, China activity data, Japan CPI, jobs data from UK and Australia; our week ahead preview can be accessed here.

EQUITY NEWS:

CONSUMER:

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  Consumer Goods - Prices of everyday items like bread and toilet roll have increased steeply, making shoppers unhappy, FT reports. Despite this, large consumer goods companies like Kimberly-Clark (KMB) and Procter & Gamble (PG) are making profits due to resilient sales volumes. However, as these companies try to restore their profit margins, some powerful supermarkets are resisting their pricing demands. This is making negotiations difficult.


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  Amazon (AMZN) - To speed up deliveries and boost profits, Amazon has transformed its logistics network, cutting package travel distances, improving inventory management, and changing search results, WSJ reports. These recent changes are among the biggest to Amazon’s shipping system, and have already helped to improve the bottom line, WSJ added. Additionally, Amazon intends to use AI to speed up deliveries, minimizing distance by regionalizing warehouses and predicting demand. CNBC reports.


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  Ford Motor (F) - Positive mention in Barron’s, citing valuations.


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  Nike (NKE), Adidas (ADDYY) - Vietnam shoemaker PouYuen Vietnam, a unit of Taiwan-based Pou Chen Group, who manufactures products for Nike and Adidas, has cut 6,000 jobs amid cost-of-living crisis in US and Europe, AFP reports.

FINANCIALS:

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  US Banks - Deposits at US banks fell to USD 17.150tln from 17.164tln in prior week, according to Fed data released on Friday.


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  US Regional Banks - Regulators are open US regional banks merging due to the banking environment and financial pressure, Treasury Secretary Janet Yellen told Reuters; she did not specify any particular banks. Small community banks with insured deposits are not under pressure, Yellen said, adding that she was confident that all banks have enough money to cover unexpected deposits from uninsured depositors.


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  BlackRock (BLK) - Co-founder Larry Fink has no imminent plans to retire, but is grooming several executives who could take the reins, WSJ reports. He and BLK’s president Rob Kapito have been training five key leaders for years, a contest that some inside the company call ‘The Great Race.’ WSJ says that among the contenders are Mark Wiedman, who runs the global commercial business; Chief Operating Officer Rob Goldstein; and Chief Financial Officer Martin Small. Rachel Lord, who is head of the Asia Pacific business, and Salim Ramji, the head of ETFs and indexing products.


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  UBS Group (UBS), Credit Suisse (CS) - A CDS committee is considering whether Credit Suisse’s bonds being written down should trigger credit default swaps, Bloomberg reports. The committee’s acceptance is the first step in a process that will determine if the swaps will be triggered. Some funds have been buying swaps insuring Credit Suisse’s subordinated bonds, betting that the write-down could lead to a pay-out of the derivative contracts.


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  Societe Generale (SCGLY) - Outgoing chief Frédéric Oudéa dismissed the risk of US banking turmoil spreading to Europe, stating that the region’s tougher regulation was a fundamental contrast that helped shield the sector. Oudéa is due to step down at the end of this month, and is confident that the European banking sector would continue to be extremely solid in the coming quarters.


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  Coinbase (COIN), PayPal (PYPL) - Said UK and Canadian customers were unable to sell or make withdrawals to PayPal.


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  Crypto - DoJ national cryptocurrency enforcement chief Eun Young Choi has promised to crackdown on illicit behaviour on digital platforms, saying the scale of crypto crime has grown significantly in the past four years, FT reports. DoJ is targeting crypto exchanges along with the mixers and tumblers that obscure the trail of transactions, and is targeting companies that commit crimes themselves or allow them to happen.


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  Tesla (TSLA) - CEO Musk will attend a business conference in France, and will meet with French President Macron, Bloomberg reports.

TECH:

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  Western Digital (WDC), Kioxia Holdings (private) - Japan’s Kioxia and Western Digital Corp are stepping up merger talks, Reuters reports, as a slumping flash memory market puts fresh consolidation pressure on the world’s No. 2 and No. 4 players. The reports said that the merged entity would be 43% owned by Kioxia, 37% by Western Digital and the rest by existing shareholders of the companies. Combining their flash memory businesses could boost competitiveness against rivals like South Korea’s Samsung Electronics.


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  Foxconn (HNHPF), Infineon (IFNNY) - Apple supplier Foxconn is focusing on producing automotive semiconductors in-house to increase its profits in electric vehicle assembly, Nikkei reports. Foxconn aims to offer customers competitive automotive solutions and has partnered with Infineon Technologies, a German company specialising in power semiconductors that help boost efficiency and extend driving range in EV motors.


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  Lyft (LYFT) - CEO stated that the company is not actively seeking a sale, but would consider offers if they were to come along, Bloomberg said, noting that this is a change from an earlier position this year, when CEO said that Lyft was not interested in a sale.

COMMUNICATIONS:

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  Manchester United (MANU) - Sir Jim Ratcliffe is reportedly close to buying the world’s best football club, Manchester United, after the Glazers and their bankers agreed to discuss the deal with the British billionaire’s team at Ineos, The Times reports. The Glazers and The Raine Group are said to be willing to enter final talks with Ratcliffe after his offer represented the highest valuation for the Premier League club. The deal could reach up to GBP 6bln.


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  Spotify (SPOT) - Spotify plans to leave five floors of its office space in Manhattan’s 4 World Trade Centre, and will look for someone to sublease them, Bloomberg reports.


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  Nintendo (NTDOY) - Positive mention in Barron’s, said the New Zelda game is good for Nintendo’s stock, and the real boost is still to come with films and theme parks extending the attachment to younger generations.

ENERGY:

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  OPEC Supply - Iraq oil minister Hayan Abdel-Ghani does not expect OPEC+ to make further cuts to oil output at its next meeting in June, Reuters reports, the first indication from an OPEC minister about a potential decision as oil prices slide.


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  Russian Supply - The G7 and EU will ban Russian gas imports on routes where Moscow has cut supplies, according to officials involved in the negotiations, the first time pipeline gas trade has been blocked by western powers since the invasion of Ukraine, FT reports. The decision will finalised by G7 leaders in Japan this week, and will prevent Russia resuming gas exports on routes to countries such as Poland and Germany, where Moscow cut off supplies last year.


• 
  Rig Count - Friday’s weekly rig count data from Baker Hughes showed oil and gas rigs falling 17 to 731 in the week, the lowest since June 2022, and the largest weekly decline since June 2020.


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  ONEOK (OKE), Megellan Midstream Partners (MMP) - ONEOK to acquire Megellan Midstream in a cash and stock deal valued at around USD 18.8bln including assumed debt. The deal is likely to create one of America’s largest pipeline operators, Bloomberg said, and will allow ONEOK to expand into oil and products transportation.

MATERIALS:

• 
  Newmont (NEM), Newcrest (NCMGY) - The world’s largest gold producer Newmont has agreed to acquire Australian rival Newcrest for USD 19.2bln, amounting to the gold mining sector’s largest deal to date. The acquisition will consolidate Newmont’s position in the gold mining industry with mines across four continents and boost its resources of copper, a metal that is expected to see a rise in demand as the world transitions away from fossil fuels, Bloomberg said. The deal is pending regulatory approval.

INDUSTRIALS:

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  Solar Companies - The US Treasury Friday issued new rules for solar developers to receive tax credits only if they used domestically made cells. However, as the US has very little solar cell production capacity, the rule will prevent most developers from using the subsidy, FT reports. Additionally, some analysts said the guidelines do not go far enough to try to lure manufacturing back from China, NYT reports.


• 
  Rocket Lab (RKLB), Planet Labs (PL) - Positive mention in Barron’s, which identified the two names as a play on the Space business, which could rise to USD 1tln.

UTILITIES:

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  Edison International (EIX) - Edison expects to reaffirm its 2021-2025 core EPS growth rate target of +5-7%, and is set to announce long-term core EPS compound annual growth rate with a base year of 2025 and an ending year of 2028. The starting point will be the midpoint of Edison International’s 2025 core EPS guidance of between USD 5.50-5.90/shr. This period coincides with the capital expenditure and rate base forecasts through 2028.

HEALTHCARE:

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  Sarepta Therapeutics (SRPT) - FDA advisers Friday recommended that Sarepta be granted accelerated approval for its first-of-its-kind gene therapy for Duchenne muscular dystrophy (DMD), by a vote of 8-6.


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  Pfizer (PFE), Stryker (SYK) - Positive mention in Barron’s; the report states that healthcare stocks are on sale, and Pfizer and Stryker both have strong growth prospects.


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  Novavax (NVAX) - CEO wants governments to keep their promises to buy COVID-19 vaccines, as the US biotech company struggles due to decreased demand for jabs, FT reports. NVAX has USD 2.1bn in agreements with the US stretching into 2025, but are unsure if governments will honour them.


• 
  Universal Health Services, Inc. (UHS) - CEO Marc Miller sells 44.1k shares on May 10th for a total USD 6.3mln.

15 May 2023 - 09:00- EquitiesData- Source: Newsquawk